Status report

• In the fall of 2016, we increased the risk (beta) in both funds, CB European Quality Fund (EQF) and CB Save Earth Fund (SEF), primarily by increasing our exposure to cyclical companies within the Industrial sector. Now, two years later, we have reduced the risk in the portfolios, mainly by decreasing exposure to high-valued growth companies in favor of larger quality companies with lower but more stable growth, as well as lower valuations. As a result, beta has decreased, as have P/E ratios. See pages 2 and 3.

• We believe the high valuation of growth companies is threatened by rising interest rates and a matured economy, especially in the USA. This, in itself, may not be negative for the stock market, but it is likely to push down the valuation of growth companies and lead to a rotation in the market from growth companies to quality and value companies (benefiting from a matured economy and higher interest rates) – a rotation we have seen recently. The obvious example of this is the IT sector, which has been driving the market for the past 5 years in a way we haven’t seen any other sector do since the IT bubble in 1999-2000, both in terms of how significant the outperformance has been and how long it has lasted. The fact that one sector has performed so much better than all other sectors, as IT has done now, does not necessarily mean it’s a bubble, but it probably means that some other sector needs to take over as the best-performing sector and the one driving the market, thus rotation. See page 4.

• It does not appear that the market has “run away” too much in recent years; rather the opposite. In Europe, most markets are below their long-term trend returns, here exemplified by the United Kingdom, Sweden, and Switzerland. The exception is the USA, which is above its long-term trend return. During previous significant downturns (>20%), several markets have been above their long-term trend returns simultaneously (red vertical lines) – this is not the case this time. See pages 5 and 6.

Click here to download the report (PDF, in Swedish).